Mortgage Tip Of The Week: Can I Break My Mortgage?

A common question I receive from clients is if they can break their mortgage and how much will it cost if they do. There’s no easy answer to this question unless you know the type of mortgage you are in because different mortgages have different terms and conditions.

Unless you are in a Fully Open Mortgage or a Homeowners Line of Credit you will always pay a penalty if you break your mortgage term early for any reason. Some No-Frills products don’t even allow you to break your mortgage early for a refinance or switch for any reason whatsoever unless it’s a bonafide sale of your property or have an exorbitant 12 month interest penalty.

The majority of Canadians choose either a Closed Fixed Rate or Closed Variable Rate Mortgage. With these two different mortgages there are different ways the lender calculates your penalty should you choose to break your mortgage term early.

An Interest Rate Differential (IRD) amount is a compensation charge that may apply if you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount. The IRD amount is calculated on the amount being prepaid using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that lenders can now charge when re-lending the funds for the remaining term of the mortgage. There is also no standard for calculating an IRD and the only way to properly calculate an IRD is to request a discharge statement from your lender.

Variable Rate Mortgages: There is typically no IRD penalty associated with Variable Rate Mortgages however some No-Frills Variables may have and IRD. With the majority of Variables on the market and the ones I offer clients have only a 3 month interest penalty should you pay off your mortgage principal prior to the maturity date or pay the mortgage principal down beyond the prepayment privilege amount.

As you can see more to consider than just rate but also taking into consideration to your needs down the road. If you have questions about what product is best for you don’t hesitate to contact me or leave a comment.